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Unauthorised transactions in breach of a director’s statutory and general law duties: In the matter of FAL Healthy Beverages Pty Ltd and FAL Retail Pty Ltd [2017] NSWSC 476

The Supreme Court of New South Wales has provided some valuable insights into the nature, content and relevant parameters of the duties of directors under sections 180, 181 and 182 of the Corporations Act 2001 (Cth) (Act) (and the corresponding general law duties), as well as shareholder ratification as a defence to a claim for breach of duty.

FAL Healthy Beverages Pty Ltd (FAL HB) and its subsidiary FAL Retail Pty Ltd (FAL Retail) brought proceedings against Mr Tim Xenos for breach of statutory duties under the Act and fiduciary duties in connection with several unauthorised transactions which benefited him financially.

Mr Xenos was the director (for some periods by formal appointment and for some periods as a de-facto director) and chief executive officer of both FAL HB and FAL Retail and held a 2.5% share in FAL HB. At the time of his appointment as chief executive officer and for a considerable time thereafter, Mr Xenos was an undischarged bankrupt and was prohibited from managing FAL HB and FAL Retail under section 206B of the Act.

Black J in the Supreme Court of New South Wales held that on the evidence, Mr Xenos had, in breach of his duties, caused FAL HB (and in some cases, FAL Retail) to make unauthorised payments to:

a company controlled by Mr Xenos and another company with which Mr Xenos was pursuing other business opportunities;

Mr Xenos’s own bank account as reimbursement where Mr Xenos was unable to provide records to substantiate a proper basis for those payments;

the NSW Office of State Revenue for speeding and other fines in relation to Mr Xenos’ car; and

a law firm for fees in connection with ‘commercial matters relating to FAL HB’ which, to the contrary, pertained to advice relating to Mr Xenos’ bankruptcy.

The evidence also showed that Mr Xenos was the sole signatory on all of FAL HB and FAL Retail’s bank accounts and that he authorised payments through the NAB Connect platform and in some cases, generated false or at least misleading invoices.

In finding that Mr Xenos had breached his duties under section 180 (to exercise care and diligence), section 181 (to exercise his powers and discharge his duties in good faith in the best interests of FAI HB and FAL Retail and for a proper purpose) and section 182 (to not improperly use this position to gain an advantage for himself or someone else, or cause detriment to FAL HB or FAL Retail) of the Act, and his corresponding general law duties, Black J observed that:

Mr Xenos’ contention that FAL HB and FAL Retail had not made out their case due to an absence of adequate documentary support for the impugned transactions was unfounded. Rather, as a director and officer, Mr Xenos was obliged under section 286(1) of the Act to keep (or cause to be kept) written financial records that accurately record and explain transactions and the financial position and performance of the companies, and that would enable true and fair financial statements to be prepared and audited;

it was not essential for FAL HB and FAL Retail to prove that Mr Xenos directly conducted the transactions himself. Rather, the breach of duty is made out if he otherwise procured, permitted or authorised the payments (through requesting the payments or submitting false invoices to the accounting staff) or if he knew that the payments were to be or had been made and did nothing to stop or return those payments. It would be sufficient to establish a breach of section 180 if Mr Xenos allowed procedures to subsist which permitted the relevant payments to him and interests associated with him, and sufficient to establish a breach of sections 181 and 182 if he allowed such payments to be made for an improper purpose or to FAL HB’s detriment, whether or not he personally made them; and

Mr Xenos could not avoid liability due to the principles of ratification and acquiescence on the basis of his contention that the various transactions were approved by FAL Holdings Arabia Co Ltd as the majority shareholder of FAI HB, and Mr Xenos himself as a minority shareholder. In this regard, Black J found that:

to the extent that ratification may narrow a duty owed to shareholders so as to be relevant to determining whether a breach of a statutory duty has been established, that will be limited by a requirement of disclosure, and possibly also by public interest considerations; and

in any event, in the case of the general law duties, a ratification of, or unanimous consent to, Mr Xenos’ conduct could only be established by prior approval or subsequent ratification of the transactions by FAL HB’s shareholders with full disclosure of all material circumstances, including the character of the transactions and the nature of the relevant conflict.

Compare jurisdictions: Litigation: Enforcement of Foreign Judgments

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